David Fry's Market Outlook for Tuesday

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Includes: DBE, EFA, FXI, IEF, IGM, INP, RSX, SPY, USO
by: David Fry

D Fry Market Outlook 03 07 2007

The 'deal' news overwhelmed equities as bulls bid stocks sharply higher. Remember, liquidity for making deals is still plentiful and that keeps the market a 'stacked-deck.'

Treasury yields dropped despite a better-than-expected ISM number which should have had the opposite effect. Bullish equity investors appear to be misreading why bond yields fell. There was plenty of chatter "again" about the low "core inflation rate" as a cause for lower yields, and even another trial balloon that the Fed will cut rates.

I could be wrong, but there may be something else going on with bonds recently -- a rotation to Treasurys from soon-to-be-downgraded bonds from mortgages [subprime] and other debt instruments.

Remember there are many bond fund managers who can only own investment grade instruments. Some subprime issues may face credit rating downgrades forcing sales. We'll see.

With volume so light it was easy to push markets around.

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Meanwhile overseas markets are still strongest, particularly in the most volatile sectors.

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With liquidity this high, it's a 'stacked-deck' as deals become more pronounced and that encourages bullish sentiment. That's no surprise.

The news surrounding further Iranian and Hezbollah involvement in killing American boys in Iraq is disturbing. The commander-in-chief can't allow that to continue without a response can he?

Historically the week around July 4th has generally been a good one for bulls. I found the rhetoric about bonds to be unreasonable and poorly supported by facts.

Posting may be sporadic since Tuesday is a half day and Wednesday markets are closed. We may get some fireworks with Friday's employment report.

Chalk one up for the bulls.

Have a safe and pleasant holiday.

Disclaimer: Among other issues the ETF Digest maintains long or short positions in: United States Oil Fund ETF (NYSEARCA:USO), PowerShares DB Energy Fund (NYSEARCA:DBE), PowerShares DB US Dollar Index Bearish (NYSEARCA:UDN), iShares Goldman Sachs Technology Index Fund (NYSEARCA:IGM), streetTRACKS KBW Bank (NYSEARCA:KBE), CurrencyShares Japanese Yen Trust (NYSEARCA:FXY), iShares MSCI Brazil Index ETF (NYSEARCA:EWZ), iPath MSCI India ETN (NYSEARCA:INP), iShares Trust FTSE-Xinhua China 25 Index Fund (NYSEARCA:FXI), iShares MSCI South Korea Index Fund ETF (NYSEARCA:EWY) and iShares MSCI Australia Index Fund (NYSEARCA:EWA).